International Submarine Cables and Hi-Speed Broadband in Australia and New Zealand

Transcription

1 International Submarine Cables and Hi-Speed Broadband in Australia and New Zealand Ross Pfeffer Since the birth of the internet, Australasian users Whitepaper First published: April 2010 have depended on undersea submarine fibre optic cables to access the great majority of content. This paper explores how the existing cables have supported, and can continue to support, the rapidly expanding requirements of Australasian high speed broadband. Page 1

2 Introduction While ISP's steadily increase access speed, expand data caps and lower prices there is a call for urgent progress towards ubiquitous high speed broadband as a foundation for stronger economic growth. Consequently both the Australian and New Zealand Governments have committed to large investments in national fibre rollouts to connect users to the internet at very high speeds. Since the birth of the internet Australasian users have depended on undersea submarine fibre optic cables to access the great majority of content which has been located 13,000 kilometres away on the US West Coast. There are currently five highcapacity fibre optic submarine cables providing this connectivity. Australia is directly connected to all five cables which are operated by four competitive suppliers, Southern Cross, Telstra, AJC and TPG. NZ is directly connected to the two fully diverse cables of Southern Cross and it has indirect access to the other cables via Sydney. This paper explores how the existing cables have supported, and can continue to support, the rapidly expanding requirements of Australasian high speed broadband. After considering issues related to connectivity, latency, diversity, supply and price the paper concludes that the existing cable network is unlikely to impede the achievement of ubiquitous and affordable high speed broadband in both Australia and New Zealand. State of the Broadband The move from 56 kbps dial-up access to broadband access (at 256 kbps or greater) began the early 2000 s and is now virtually complete with broadband connections accounting for more than 80% of Australasian internet subscribers. At the same time downloads of data increased rapidly, increasing from an average of 2GB to 5GB per Subscriber per month in the last three years at a rate of 35% pa. Less than 5% of internet users consume more than 40% of internet capacity using YouTube, streaming video, P2P and similar applications. Left unmanaged these users quickly consume the additional capacity allocations of ISP s for which no additional revenue is received Rapidly growing and now standing at 33% of Australian Broadband connections it will not be long before High Speed Broadband dominates. ADSL2+ access at up to 24 Mbps is now available as an option for the majority of Australasian subscribers and some ISP's are now deploying 100 Mbps access over copper in Australia. Within the next five years Government initiatives for Fibre to the Premises (FTTP) are expected to complete the transition to high speed broadband with 100 Mbps access available to the majority of subscribers. Capacity, ISP s and Broadband Performance With the availability of high speed access it needs to be understood more than ever how other factors affect the performance of broadband. Given Australasia s dependence on off-shore internet servers, the volume of international capacity that ISP's use to support their internet customers is clearly crucial. If ISP's do not procure sufficient capacity, service will be too highly contended thereby negating the advantage of high speed access. But factors such as the volume of domestic trunk capacity used by ISP's, the speed of internet routers and the speed of internet servers are just as, if not more, important. Any one of these factors has the ability to choke Broadband performance. Page 2

3 Does Cable Latency Affect Internet Performance? Despite being located 13,000 kilometres from most internet content it only takes less than one tenth of one second for data to span the oceanic divide using Australasia's fibre optic cables. The lowest latencies are provided by Endeavour and Southern Cross, 67 msec from Sydney and 60 msec from Auckland respectively. Both AJC and TPG's PPC-1 involve longer latency at around 100 msec from Sydney. These achieved cable latencies do not impede service quality; they do not slow down the internet or increase the time it takes to download data. In fact these transmission delays are unnoticeable and it is unlikely that any future cable build will improve internet service through lower latency. Cables, ISP s and Service Continuity Two types of cable system support the Australasian market, protected (Southern Cross) and single strand (AJC, PPC-1 and Endeavour). As a protected system Southern Cross has an expected average annual unavailability of just 5.25 minutes. This compares with the global average of 7.3 days unavailability for single strand cables. So if ISP's place all or too much of their capacity on one single strand cable they run a serious risk of service disruption which can last for 5 to 30 days depending on the nature of the outage. While cable operators do everything to minimise outages in the end transmission on any single cable will inevitably be disrupted. It is up to Australasian ISP's to ensure that service to internet users is not interrupted or downgraded as a result. Fortunately ISP's have plenty of choice for maintaining constant service; they can place their capacity on the fully protected diverse cable system (i.e. Southern Cross), they can purchase spare capacity on diverse cables or they can spread their total capacity over at least three single strand cables to form a mesh network so that service disruption is only proportionately impacted. Capacity Demand Over 90% of international capacity demand is generated by internet traffic. The main factors fundamentally driving Internet capacity demand are applications, content, access speed, user requirements and retail prices. The daily patterns of internet usage mean that it is household peak demand that determines the total capacity requirements of ISP's. However their internet revenues are derived from both household and business subscribers. International capacity demand is moderated by the local caching of often used offshore content and by the general availability of improving compression technologies. While Australasian caching is currently modest it is growing and is expected to become very significant by 2015 as part of the global trend of content providers to move content closer to users. Similarly demand is moderated by application technologies such as compression which continue to develop, allowing users to download higher quality and more video using less capacity. Interestingly both caching and compression can also be viewed as a source of increasing international demand by encouraging users to download more in general. By end 2010 unprotected and non-cached international demand from Australasia to all markets is estimated to be 0.45 Tbps. Page 3

4 Around 80% of this non-cached demand terminates in the US. While the US will continue to dominate traffic, a steady decline in US centricity is expected over the period to A high proportion of traffic is protected. Protection capacity is additional unused capacity that is provisioned to support service continuity in the event of a cable failure. After taking protection into account, the total international capacity "demand" for Australasia is estimated to be Tbps by end Demand Forecasts Against the backdrop of caching, compression, contention and bandwidth management, rapid changes in the competitive ISP industry including implementation of the new 100 Mbps access and Government rollouts of FTTP it is very difficult to forecast demand. For that reason this paper considers two scenarios, a Medium Demand Scenario which is considered reasonably likely and a High Demand Scenario. The High Demand Scenario is also very achievable by the submarine cable industry but it is also dependent on faster across the board changes in the entire internet industry, from access to content, from retail price to user requirements, than are reasonably expected over the next five years. The Medium Demand Scenario has capacity demand growth accelerating over the period 2010 to 2020 in response to the expected take-up of high speed broadband with lower data costs per GByte and higher average downloads per subscriber which is estimated to increase from 5 GB to 17 GB per month. Unprotected international demand to all markets under this Medium Demand Scenario is estimated to grow by an average of 200 Gbps per year over the period 2011 to 2015, 3.2 times higher than growth over the previous five years when broadband subscriber growth was very high and capacity downloads increased dramatically. Over the last five years of this scenario average annual growth is expected to increase to 350 Gbps. The High Demand Scenario ends in 2015 (rather than 2020) and has capacity demand growth accelerating to a level that is likely to support an average download of 40 Gbytes for an estimated 11.7 million broadband subscribers in Australasia by To achieve this it is estimated that unprotected capacity to all markets needs to grow by an average of 600 Gbps annually to reach 3.4 Tbps by end For US traffic only unprotected demand is expected to reach 2.9 Tbps by end 2015 with annual growth averaging 500 Gbps over the five year period. Capacity Supply The ability of the existing Australasian undersea capacity market to supply the future needs of the market is clear. The industry already has a considerable oversupply of lit capacity and it has enormous potential to easily increase capacity at very low and diminishing marginal cost. The total lit capacity currently available from the five existing high capacity cables is 1.76 Tbps, 2.3 times estimated protected demand for end Of more relevance, by installing 40 Gbps transmission technology existing Australasian cables currently have the capability to easily and inexpensively expand total lit capacity to at least 14.4 Tbps, some 20 times today's protected demand. Looking ahead the submarine industry anticipates 100 Gbps technology becoming Page 4

5 available for upgrades within the next 5 years and this is expected to take the potential supply capability of the five existing cables to an estimated total of at least 50 Tbps by 2020 exceeding our Medium Protected Demand Scenario by a factor of 10. Internet Pricing Retail broadband prices for data depend on ISP costs, network practices and retail competition ISP s face international capacity prices, domestic trunk network costs, international cache share and charges, equipment costs (such as DSLAMs), wholesale Internet charges (such as copper access charges) and US termination charges. They enter into peering arrangements and they run their networks with contention rates designed to optimise service and cost. Most importantly retail internet prices and related data entitlements depend heavily on ISP competition and that ultimately depends on the evolving needs of both internet users and internet applications. New applications and content are now bandwidth intensive and demand has become dominated by the requirements of various forms of video which is now larger than peer-2-peer demand. The potential for demand to continue to increase can only be realised if user data costs fall and that requires all costs to fall, not just international capacity prices, and for ISP's to pass on lower costs. Experience shows that lower international capacity prices are not always passed on to users. Instead ISP s set their prices in accordance with the competitive needs of the retail market. When ISP's have reduced the data costs of users they have generally used some of the margin that already existed. Lower international capacity prices are far from being a sufficient condition for driving demand and lowering prices in the Australasian retail market. With the Australasian capacity market characterised by considerable capacity oversupply, four competing suppliers and reducing average and marginal capacity cost, there can be little doubt that international capacity prices will continue to fall. Price declines will accelerate under the combined influences of competition, higher demand growth and lower marginal and average costs. This is not a new development; as capacity expanded over the last 10 years, international capacity prices fell quickly, at least 75% over the last 5 years and at a compound annual rate of 23% since Currently the onetime IRU price for Unprotected capacity to the US is USD 1.63M per Gbps and for protected capacity it is USD 2.72 M per Gbps. Under our medium demand scenario we expect the Unprotected Capacity IRU price to decline to an estimated USD 0.86 M by 2015 and USD 0.45 M by Under the high Demand Scenario we expect the unprotected IRU price to decline at a rate of 25% pa to an estimated USD 0.39 M by This rate of decline is similar to the decline of 23% experienced over the period 2000 to Cost of Downloads Over the last six years the international capacity cost per GByte downloaded is estimated to have fallen from USD 1.51 to USD 0.13 at end Looking forward if the capacity price falls in accordance with the Medium Demand Scenario the cost of data downloads should decline from USD 0.13 per GByte at end 2010 to USD 0.07 per GByte by 2015 and USD 0.04 per GByte by end Page 5

6 Under the High Demand Scenario the international capacity cost of data download is expected to decline from the current USD 0.13 to USD 0.03 per GByte at end Impact on Retail Contrary to popular belief ISP international capacity cost as a percentage of retail subscriber revenue is low. With total Australasian capacity sales from the five cables over the period estimated at around USD 3.5 Billion, capacity cost has averaged around USD 350 million per year which represents 9% of Australasia's annual broadband subscriber retail revenue of USD 3.82 B for The total purchase cost of all increased capacity growth under our Medium Demand projection for the period is estimated at USD 1.55 B representing around 7% of total subscriber revenue for the same 5 year period assuming average monthly revenue per broadband subscriber remains at the 2010 level of AUD 41 despite increasing capacity use (and also assuming capacity cost is fully paid or fully depreciated over the five year period). Under our High Demand Scenario the total purchase cost of the eightfold increase in demand where all internet subscribers download 40GB per month in 2015 is estimated at USD 2.5 B representing 11.6% of Total Broadband Revenue for the 5 years. International Price Comparisons While there is considerable scope for international capacity prices to fall through the lower cost of capacity expansions there will always be a limit to how low prices can go in the Australasian market. Due to construction cost and scale it is simply very difficult for Australasian cables to lower prices to Trans-Atlantic and Trans- Pacific levels. The average build cost per Australasian Internet user is estimated to be over nine times higher for the five Australasian cables when compared with the 30 Trans-Pacific and Trans-Atlantic Cables in use today that have an internet base of one billion users. Users and Broadband Plans Today high speed broadband users have much more choice and face far lower retail costs than just a few years ago. At the same time users are far from homogenous and their internet requirements reflect that. Some users already pay more to download more and others may only download if total cost does not increase. An analysis of 60 Naked Broadband Plans available from the top 23 ISP s in Australasia shows many users pay much more for data than they need to. While all ISP' s have purchased capacity on the same international capacity market the implicit cost of peak data in retail plans ranges from a low of USD 0.25 to a high of USD 2.55 per Peak GByte. The average (unweighted) retail cost of data under all these plans is USD 0.93 per GByte and this compares with the estimated current cost of international capacity at USD 0.13 per GByte. Long Term Cable Returns The current cost of rebuilding the five cables directly connected to Australasia is around USD2.5 billion. These cables have involved a very high upfront investment with expectations for achieving returns over an acceptable time horizon. But the recent commercial struggles of at least two of the existing systems (AJC and PPC-1) reflect how difficult this expectation is to achieve. And if Telstra did not have its large broadband subscriber base it is unlikely that it would have made its investments into Endeavour and AAG. Page 6

7 In an already competitive environment new cable investments find it increasingly difficult to repay debt even when capacity demand increases very rapidly. Unless there is a natural captive demand source for new cables (i.e. direct or indirect "ownership" of large internet subscriber bases) a new cable can only expect to achieve a small market share over time. It will struggle to achieve proportionate market share and the more cables that supply a competitive market the lower the share they can expect to achieve and the longer it will take to repay debt and make a return. Repayment of debt and return on investment is now very difficult to achieve in the Australasian market. Given the long term Medium and High Demand price outlooks of the Australasian capacity market any additional cable is unlikely to generate revenues exceeding cost over a 20 year period. The time to repay interest and actually make a profit will be even longer suggesting additional cables can never become profitable within their expected life of 25 years. Do new cables drive down price? In order to gain market share new entrants to the Australasian undersea cable market have invariably offered lower prices. While this price pressure has been real the price reduction has not caused demand to increase. Demand increases only when a number of factors work in concert as discussed earlier and these demand increases require retail prices to fall (also questioned earlier) and bottlenecks to be reduced. The market impact of a new cable is widely viewed as positive for the internet but that can only be true if the cable industry is not already competing and expanding its capacity at lower cost to meet rising price sensitive demand at lower price. The longstanding evidence of price decline and capacity expansion in the Australasian market indicates competition is strong and at the same time existing cables have appreciated the need to reduce their price to assist the market to grow by expanding their capacity well ahead of demand requirements. New Zealand Issues On the face of it New Zealand has just one supplier, Southern Cross with 50% ownership of the company in the hands of Telecom New Zealand. This arrangement is often viewed with suspicion and it is combined with an unsubstantiated assertion of high cable disruption risk to justify poorly thought through measures that will somehow lift New Zealand out of an asserted digital divide. New Zealand is an integral part of the Southern Cross ring network and its capacity market has always been treated the same as Australia. If Southern Cross has somehow held back the development of broadband in New Zealand then it must have done so in Australia and nothing could be further from the reality. Southern Cross has supplied the Australian market in a competitive environment for 10 years and has never been in a position to restrict capacity or hold up price as some have argued. While Southern Cross is the only supplier to the NZ market, its New Zealand to US connections have always been priced the same as its Australia to US connections and it has publicly committed to keeping its NZ- US pricing no higher than its AU-US pricing. The Australian market has always been served by multiple cable systems and competition is well developed. So the Southern Cross pricing policy means the NZ market has and will continue to receive the benefits of competitive Australian pricing. Page 7

8 Southern Cross is an independent company that was set up by its owners to build, operate and market network capacity. It is owned by three companies, TNZ, Singtel and Verizon Business and they have quite different business drivers. These companies control Southern Cross through a shareholder Agreement that requires important policy matters to be agreed by all owners, either unanimously or by a super majority, not just one. A high proportion (52%) of Southern Cross revenue is derived from sales to nonowners. This has been the key reason for the company's continued market success and it is due to the independence of the company and the fact that its owners have never obtained preferential pricing. The fact that New Zealand, which only accounts for less than 15% of Southern Cross revenues, has been treated as an integral part of Australia is further testimony to the independence of the company. As an integral part of the Southern Cross Ring Network New Zealand is connected to two cables and these are diversely routed from two cable stations located 15 kilometres apart in Auckland. By being transported on the protected Southern Cross ring network New Zealand traffic is protected by a system designed to achieve better than % availability and one that has achieved 100% availability for protected circuits in five years of its operation. It would take a major catastrophe simultaneously affecting both Southern Cross cables to disrupt NZ-US traffic. Even then it would depend on the locations of the disruptions because the Southern Cross network has the ability to circumvent many dual outages by directing traffic around its Inter-Hawaiian and US Terrestrial links. With the great majority of NZ-US traffic on the Southern Cross ring New Zealand is better served than Australia where a significant proportion of traffic is placed in single strand systems that have an expected annual availability of only 98%. Page 8

9 Conclusions 1. With five high capacity fibre-optic submarine cables serving the Australasian market, providing almost minimal latency and considerable diversity there is a sound platform for ISP s to provide uninterrupted broadband service to both Australian and New Zealand. 2. Lit capacity from the five cables already exceeds international capacity demand by a factor of three and this can now be expanded quickly at low cost to more than 10 times today s demand 3. The capability of the five cables through further upgrades is expected to exceed 30 Tbps by The demand for international capacity will expand very quickly with the universal adoption of high speed broadband. Under both medium and high demand scenarios this demand can easily be met by the existing cables. 5. Under the High Demand Scenario unprotected demand to all markets will increase from 0.45 Tbps today to 3.4 Tbps in The cable industry has steadily decreased price at a compound rate of 23%pa since 2000 in response to reduced marginal supply cost, price sensitive increasing demand and increased cable competition. 7. These same factors will continue to drive future prices down and the high demand scenario is achievable if price declines continue at an average compound rate of 25%. 8. The combination of excess supply, four competing systems and rapidly declining price mean that a number of cables will struggle to achieve a financial return. 9. Any additional cable to the US will have a very large upfront cost but will enter the market at very low price, it will struggle to recover its build cost within 20 years and will probably never make a financial return before its end of life. Page 9

10 Unprotected ANZ Demand - Medium and High Projections (Tbps) Australasian Capacity in 2010 (Tbps) Unprotected Demand All Markets - Medium Proj (Tbps) Unprotected Demand All Markets - V High Proj (Tbps) Active Unprotected Active Protected Lit Potential $40 $35 $30 $25 $20 $15 $10 $5 $ Price per Gbps (US$M) Based on Southern Cross Stm16-2d Southern Cross Total Lit Capacity (Tbps) Protected Capacity Price per Gbps (USD M) Unprotected Capacity Price per Gbps (USD M) Supply Potential and Protected Demand for All Markets (Tbps) 2002 Capability High Demand Proj Medium Demand Proj Series4 Peak Data Entitlement (GB) ANZ Naked Broadband Plans Peak Data Cost per GByte $0 $1 $2 $3 $4 Cost per Peak GByte (USD) AU: 48 plans from top 16 ISP's with >= 20 GB Peak Data NZ: 12 Plans from Top 7 ISP's with >= 20 GB Peak Data GBytes that can be Downloaded Dollar Cost of International Capacity Medium Demand Gbytes per US Dollar High Demand Gbytes per US Dollar Page 10

11 About Southern Cross Southern Cross Cable Network provides fast, direct, and secure international bandwidth from Australia, New Zealand, Fiji and Hawaii to the heart of the Internet in the USA. The Southern Cross Cable Network comprises two submarine communications cables which were first commissioned in November 2000 and January 2001 at a cost of USD1.3 billion. They provide Australasian broadband users with international connections to the US West coast where global Internet hubs are located. The Southern Cross network has been engineered until at least Network capacity has been expanded on multiple occasions, with the last (G3) upgrade in Q increasing capacity to 1.2Tbps. The current upgrade will increase lit capacity to 2Tbps by Q The Southern Cross Cable Network is owned by Telecom NZ (50%), Singtel-Optus (40%) and Verizon Business (10%). Southern Cross Cable Network has offices in Bermuda, Sydney, Auckland and Wellington. For more information visit Southern Cross at: About the Author Ross Pfeffer is the Director, Sales & Marketing for Southern Cross Cables Limited, located in Wellington New Zealand. Page 11